Smartphone maker Xiaomi makes Malaysian debut: Page 2 of 2

Making money
 
According to Lin, Xiaomi’s business model is the ‘triathlon business model,’ comprising control over the hardware, software and the services it sells.
 
When asked whether this business model is viable, given that its products are sold at near-cost price, he said Xiaomi has factored this in and makes money out of other services and products it sells, adjunct to the sale of its smartphones.
 
“We use the same model that Google and Facebook use. The base services of all these software are free but they make money from other services. And it’s the same with us.
 
“For instance, last year at a Mi Friends Festival in China we organised, we sold 1.3 million phones in less than 12 hours. But we also sold 740,000 power banks, 520 thousand earphones, and more than 300,000 smartphone back covers,” Lin said, adding that this model will be replicated here in Malaysia.

He said that given the huge customer base it has, Xiaomi can also capitalise on selling advertisements and other things such as in-store gaming credits and merchandising to complement its smartphone revenue.
 
Besides these other revenue streams, the company also designs and sells mobile Internet-connected devices such as routers, media streaming players and smart TVs. It also has a tablet portfolio, the MI Pad, that is in the pipeline.
 
Keeping up with demand
 
Smartphone maker Xiaomi makes Malaysian debut: Page 2 of 2One of the criticisms Xiaomi has had to field was the fact that the company is trying to limit the supply of its products in a bid to create pent-up demand.
 
When quizzed, Lin flatly denied this, saying that this "can’t be the case" as it’s counter-intuitive to its volume-based sales model.
 
“This is simply not true. We are not trying to create artificial demand this way and in fact, this doesn’t help us as the more smartphones we sell, the more we can sell other services to our customers,” he said.
 
Lin attributed this perception to the fact that it usually takes four to six months for its suppliers, notably chipmakers, to ramp up their production capacity before they are able to meet sales demand.
 
“At Xiaomi, every time we launch a product, we want to give our customers our top-of-the line products. As we exit our R&D (research and development) cycle, our chipmakers and other suppliers normally take four months before they can ramp up their production to meet the demand, which is faster than the industry standard of six months. This is why there seems to be a delay in meeting our customers’ demand,” he argued.
 
Analyst weighs in
 
According to Analysys Mason, Xiaomi is one of the fastest-growing smartphone vendors in the region thanks to a disruptive business model that allows for high-quality builds at very low price points.
 
The British-based telco research firm says that in less than three years, the Beijing-based company has become a top-5 smartphone manufacturer in China.
 
It noted that Xiaomi first started out as a software and services company, but entered the mobile device and consumer electronics market using the same strategy as Amazon in the tablet market, and video game console manufacturers.
 
“It provided extremely inexpensive hardware – almost at cost – and makes money on software and services,” the firm said in a research note. “The manufacturer generates more than US$4.95 million per month in revenue from its software services."
 
The analyst firm also said Xiaomi initially sold its smartphones only in China, but expanded into Hong Kong and Taiwan in April 2013, launching the phones at prices equivalent to those in China.
 
A primary focus for Xiaomi and one of its core strengths, said Analysys Mason, is the development of close ties with consumers through user interaction and feedback.
 
It said Xiaomi operates many user forums, in as many as 21 countries, which it monitors closely for feedback from consumers – even allowing them to vote on any disagreements between users.
 
“For example, specific functions of the phones or the UI, such as shortcut buttons. It then incorporates users’ suggestions into its weekly software updates, which it distributes ‘over the air’ or through the PC every Friday.”
 
Analysys Mason said operators worldwide would want to monitor Xiaomi's progress, given the surging demand for its handsets in China, Hong Kong and Taiwan.
 
“However, it has yet to be seen whether the manufacturer's business model of generating revenue primarily from software and services will be sustainable in non-Chinese speaking countries, where Google dominates the market for Android apps.”
  
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